Starting and growing a business requires working capital. There are many ways that you can invest in your business.
Let’s take a look at one of them: a business line of credit.
What is a business line of credit?
A business line of credit is flexible, revolving capital that gives you access to cash. Here’s how it works: a bank or online lender may approve your established business for a certain dollar amount, or limit. When you withdraw funds, interest starts to accrue only on the amount withdrawn while the amount left becomes your remaining available credit.
For example, if you have $10,000 in credit and spend $2,000, you have $8,000 in remaining available credit and are now required to pay interest on the $2,000 withdrawn. Because a business line of credit is revolving credit, you will once again have access to the full $10,000 once you pay back the $2,000 that you withdrew.
A business line of credit can be used again and again (provided you’re within your credit limit and in good standing) and you can apply for one before you anticipate actually needing it. Your line of credit also doesn’t have to be used on just one thing. You may use it to purchase inventory at one time and then for an unforeseen repair the next.
How is a line of credit different from a term loan?
A term loan is a type of business loan that is repaid on a regular schedule with a fixed or floating interest rate. A loan gives you all the money at once, in a lump sum. This means that if you need additional capital, you would have to apply for a new loan or refinancing.
Depending on the loan provider, you may need to have a specific purpose, with a stated goal and projected benefits, to apply for a loan (although this isn’t always the case). Term loans are often used for larger investments, like equipment or technology for your company.
If you’re interested in applying for a term loan, you’ll want to do your own research on lending institutions. Among the things you should pay attention to are the total payback and the ease of repayment.
How is a line of credit different from a credit card?
Both a credit card and a line of credit are revolving forms of credit, but there are a few differences. The money from a line of credit is sent to your bank account, so you can then use it to write cheques, pay invoices or run payroll for your business. Lines of credit are also typically used for larger purchases than you might use a credit card for and come with a maximum credit limit, so you control how much you spend and the cadence with which you spend it. Credit cards, on the other hand, typically come with a physical card, which allows you to make purchases up to a credit limit. Credit cards also require you to make minimum monthly payments (with interest) if you are unable to pay the monthly bill in full.
How can I use a business line of credit?
There are a several ways you might use a business line of credit. Some factors that will influence usage include how large your line is and how quickly you can pay it off.
Because business lines of credit can be procured before you know what you might need the funds for, they can come in handy when you have unforeseen expenses or need to manage your cash flow.
For example, if you run a salon and experience an unexpected pipe burst, you could use cash from a line of credit in the short term to fund a quick repair bill (so you don’t lose out on too much business).
Or suppose you run a restaurant that also caters to large events. If your invoices aren’t being paid quickly enough, but you need to buy inventory for your next job, a line of credit could fill that gap until invoices are paid.
Whenever you decide to seek funding for your business—whether it’s a business line of credit, a small business loan , a small business line of credit or another form of financing—be sure to do your research, thoroughly review your books and consult with your legal or financial advisors.
What types of business lines of credit are there?
There are two kinds of business line of credit: secured and unsecured. Secured lines of credit are backed by your assets, such as equipment, which serve as collateral and which lending institutions may take possession of in case of default. A small business line of credit, specifically, is typically offered as an unsecured debt, which means you do not put up collateral.
How to get a business line of credit
The process to obtain a secured line of credit may take longer than the process for an unsecured line because your assets may need to be verified and appraised as a source of repayment. Whether or not your line of credit is secured or unsecured may also affect the amount of money that you have access to and the interest rate that you are charged.
If you’re interested in how to obtain a business line of credit, you’ll need to talk to your lending institution to determine what a secured or unsecured line would look like for your business and what materials you will need to provide for the application. The requirements and repayment terms can differ among lending institutions and online lenders.
FAQ
Where to get a business line of credit
There are many options when it comes to acquiring a business line of credit. Here are just a few:
Traditional banks: You can inquire in person or look on a bank’s website to see the terms and interest rates for business lines of credit they offer.
Credit unions: Like a bank but owned and operated by its members as a cooperative, a credit union is a non-profit financial institution that distributes any profits among its members. Members are often part of a shared community, such as a group having the same employer. In addition to offering traditional banking services like savings accounts and accepting deposits, credit unions also offer business lines of credit.
Online lenders: Typically referred to as non-bank lenders, online lenders may not accept deposits or have in-person locations, and may offer more restrictive offerings to their customers. However, among those restricted offerings, they can typically offer loans, lines of credit or credit cards.
Canada Small Business Financing Program (CSBFP): Run by Innovation, Science and Economic Development Canada (ISED), a department of the Government of Canada, the CSBFP is designed to ease access to loans and other financial products for small businesses by sharing the risk with lenders. Products include a new class of loans as well as lines of credit.
Is there interest on a business line of credit?
A business line of credit typically comes with interest. However, you will only pay interest if you draw from it. Interest rates can vary depending on the lender. As the borrower, you are responsible for paying interest on the money you borrow.
According to Statistics Canada, the average line of credit interest rate is 10.86% for unsecured lines of credit and 6.86% for secured lines of credit. The interest rate you get often depends on your creditworthiness. Factors like the length of time you’ve been in business, your credit scores and other business-related financials all contribute to your overall creditworthiness. The better your credit, the more likely you are to be offered a favourable interest rate and lower fees.
Square Loans, LLC and Square Financial Services, Inc. are both wholly owned subsidiaries of Square, Inc. Square Loans, LLC d/b/a Square Loans of California, LLC in FL, GA, MT and NY. All loans are issued by either Celtic Bank or Square Financial Services, Inc. Square Financial Services, Inc. and Celtic Bank are both Utah-Chartered Industrial Banks. Members FDIC, located in Salt Lake City, UT. The bank issuing your loan will be identified in your loan agreement. The individual authorized to act on behalf of the business must be a US citizen or permanent resident and at least 18 years old. Loan eligibility is not guaranteed. All loans are subject to approval.